Business Liability Insurance: Meaning, Overview, Types

What Is Business Liability Insurance?

Business liability insurance protects the financial interests of companies and business owners in the event that they face formal lawsuits or any third-party claims. Such policies cover any direct financial liabilities incurred, as well as any legal defense expenses. The three main types of business liability insurance are:

General liability insurance
Professional liability insurance
Product liability insurance

Key Takeaways

Business liability insurance protects the financial interests of companies and business owners.
Types of business liability insurance include general liability insurance, professional liability insurance, and product liability insurance.
This insurance protects the financial interests of business owners from penalties they may face from litigation waged against them while also covering the associated legal costs.
The cost of coverage is influenced by the type of business being insured as well as its location (companies located in flood-prone regions are likely to pay more).

Understanding Business Liability Insurance

Small business owners put their personal finances at risk in the event of a business-related lawsuit. Partnerships and sole proprietorships are particularly vulnerable to exorbitant expenses and are consequently in the greatest need of this type of insurance coverage. Even under the structure of a limited liability corporation (LLC), an owner may still be exposed to personal risk.

Business liability insurance protects a company’s assets and pays for legal obligations, such as medical costs incurred by a customer who gets hurt on store property, as well as any on-the-job injuries sustained by employees.1

Businesses that tend to carry higher risks than traditional liability insurance covers can augment their coverage limits with an excess of loss reinsurance or umbrella insurance.

Liability insurance also covers the cost of a company’s legal defense, while paying for any settlement offerings or awards a company is mandated to pay as per legal judgments leveled against them. These costs may include compensatory damages, non-monetary losses suffered by the injured party, and punitive damages.1

For businesses that rent the commercial real estate property in which they operate, general liability insurance protects against liability from the damage they may suffer due to fire, mold, floods, or other physical catastrophes.

Lastly, business liability insurance also covers claims of false or misleading advertising, including libel, slander, and copyright infringement.1

The Cost of Business Liability Insurance

Coverage costs are generally determined by a business’ perceived risk levels. A building contractor who deals with heavy equipment and dangerous machinery, such as cranes and forklifts, for example, will pay more for coverage than an accountant who sits safely behind a desk.

Businesses that fall into the lower risk category may want to consider a business owner policy (BOP), which combines general liability and property insurance at a more cost-effective rate. Any new or additional business liability insurance policies should contain exclusions clauses to avoid duplication of coverage from competing insurance providers, thereby minimizing costs.2

What Is Directors and Officers (D&O) Liability Insurance?

Directors and officers (D&O) liability insurance is business insurance that is intended to protect the directors and officers of a company. Directors and officers can be sued by third parties, such as their suppliers and customers, or they can be sued by their employees. D&O liability insurance protects the personal assets of directors and assets in the event they are sued.3

What Are the Different Types of Business Insurance?

A business can purchase a variety of insurance policies to protect it from a multitude of risks. Each type of insurance policy insures against different risks. Depending on the business, it may need a few different types of insurance. Common types of business insurance include:1

General liability insurance, which protects against bodily harm to others, property damage, and personal injury
Commercial property insurance, which protects against damage to the property that you have bought or rented for your business
Business income insurance, which protects against the loss of business income
Professional liability insurance, which protects against errors that your business has made in the products/services it sells
Data breach insurance, which protects against damages caused by data breaches/cyber attacks

Is a Sole Proprietor Personally Liable for Debts?

Yes, a sole proprietor is personally liable for the debts of the company. A sole proprietorship is typically one individual running a business who is responsible for all debts and other issues, such as if they were sued.4 There is no protection against the owner’s personal assets. An LLC, on the other hand, separates a business from the owners, so that in the event an LLC is sued or there are outstanding debts, legally the personal assets of the owners of an LLC cannot be claimed.

General liability insurance also helps financially protect your business if you’re sued. Your GLI policy can help pay for your legal fees and settlement costs.

Without general liability insurance coverage, your business would have to pay out of pocket for costly claims that could come up during normal business operations.

What Does a General Liability Insurance Cover?

Bodily Injury

General liability coverage can help pay for medical expenses associated with a bodily injury that your business may have caused, like a customer slip and fall.

Property Damage

If an employee accident causes property damage, like breaking a client’s windows while working at their home, general liability insurance can help. This coverage can help cover the repair or replacement costs to fix the windows.

Personal Injury

General liability can help pay for your business’ defense costs if you’re sued for personal injury that isn’t physical, like libel or slander.

General Liability Coverage Examples

Product liability coverage can help protect your business from claims that a product you made or sold caused bodily injury or property damage to someone else’s belongings.¹ We offer product liability insurance as a part of your general liability insurance policy.
Product recall insurance helps you manage a product recall and protects you from the financial impacts. Product recall insurance is an endorsement you can add on to your business insurance policy.
Contractual liability coverage can be added on to your general liability insurance policy. Contractual liability insurance coverage helps cover claims related to contract issues.

What Costs Does General Liability Insurance Cover?

What is general liability insurance and what does it cover? General liability insurance, also known as commercial general liability insurance or business liability insurance, helps cover:

Costs for property damage claims against your business
Medical expenses if a customer gets injured at your business
Administrative costs to handle covered claims
Court costs, judgments and settlements for covered claims

Your general liability insurance can help pay for claims up to your coverage limits, or your general aggregate. Your general aggregate for insurance, sometimes called the “aggregate limit of liability,” is the maximum amount of money your insurance company will pay out for claims during a policy period. So, if you have a $1 million aggregate limit on your general liability insurance policy, your insurance will pay for claims up the maximum amount of $1 million during the policy term.

How Much Coverage Does a Typical General Liability Insurance Policy Provide?

Your general liability insurance can help pay for claims up to your coverage limits, sometimes referred to as your per-occurrence limit and your general aggregate limit.

Per-occurrence limit is the maximum amount of money that an insurance company will pay for any one claim. For example, if you have a GLI policy with a $1 million per-occurrence limit and a $2 million general aggregate limit and you file a claim valued at $1.1 million, your insurance would pay the $1 million because of the occurrence and your business would likely pay the remaining $100,000. The remaining amount left in your policy period then decreases from $2 million to $1 million.
General aggregate limit, sometimes called the “aggregate limit of liability,” is the maximum amount of money your insurance company will pay out for claims during a policy period. So, if you have a $1 million aggregate limit on your general liability insurance policy, your insurance will pay for claims up the maximum amount of $1 million during that specific policy term.

What Does General Liability Insurance Not Cover?

Be aware that general liability insurance doesn’t cover every kind of claim. For some, you’ll need different types of coverage to give your business more protection.

A general liability insurance policy won’t help your business with:

Commercial auto accidents that you or your employees cause while driving for work. A commercial auto insurance policy can help you cover the cost of damages. If your small business doesn’t have company-owned vehicles, hired and non-owned auto coverage could help, too. Be aware that many states require certain types and amounts of auto coverage, like bodily injury liability coverage or property damage liability coverage.
Employee injuries or illnesses due to their work. Workers’ compensation insurance gives your employees benefits to help them recover from a work-related injury or illness. For example, it can help cover an employee’s medical bills and ongoing care expenses.
Damage to your own business property. You’ll need to get a commercial property insurance policy to help protect your owned or rented building and business equipment.
Mistakes or errors in the professional services given to customers. Professional liability insurance can help cover your legal costs if a client sues you for a mistake in the services provided, such as bad advice given to a client or faulty workmanship.
Claims that cost more than your liability limits. You’ll need a commercial umbrella insurance policy for expensive claims. This extends the limits of certain liability insurance policies.
Illegal acts or wrongdoing that you or your employees did purposefully can result in your business being held legally responsible.

The Dangers of Not Having General Liability Insurance

State laws generally don’t require you to carry general liability insurance. However, not having coverage could put your business at financial risk.

Judgments, settlements, legal defense fees and court costs can also be extremely expensive. If someone files a claim against your business:

You’ll need legal counsel, which can cost between $100 per hour to $500 per hour.²
You may need to spend several thousands of dollars, even if the lawsuit gets dropped.
When you add the cost of administrative work, legal secretaries and any settlements or judgments, your business could face a bill totaling hundreds of thousands of dollars. The right general liability insurance policy can help your business cover these costs.

You may also find that businesses will want to make sure you have the minimum coverage they require before agreeing to work with you. They want to make sure your business can survive a liability claim and continue to do what they hired you to do. So they may ask you to provide proof of insurance, known as a certificate of liability insurance.